Saturday, March 25, 2006

Indian exchange-traded derivatives in a global context

Futures Industry magazine has an annual feature tracking the growth of the global exchange-traded derivatives business [pdf]. It is fascinating in terms of tracking what is going on in the global derivatives business. And, India shows up in some of the tables.

When we keep score in terms of the number of transactions or number of derivative contracts traded, India looks good. While that means something in terms of conveying activity, it also exaggerates India's position since the contract size or mean trade size - measured in USD - are unusually small. In the Economic Survey chapter on the securities markets, there was FIBV data showing that NSE and BSE are ranked 3 and 5 in the world by number of transactions.

At page 18, we see the amazing achievement of the Korean KOSPI 200 contract - the biggest contract in the world. We have a long way to go with Nifty, which isn't even in the top 20 contracts. At page 22, Nifty futures show up as the 7th biggest gain of the year.

At page 26, NSE shows up at rank 7 in the biggest futures exchanges of the world. Not bad - rank 3 in the world by number of transactions on the spot market, and number 7 in the world by number of contracts on the futures market. But on the next page, when we look at the sum of futures and options, Korea again rocks. NSE shows up at rank 14. This reminds us that lacking Direct Market Access (DMA), India is very weak on options trading when compared with where we are on futures trading.

At page 18 they also show a modest revival for currency futures, which saw growth of 57% compared with overall growth of 12%. When I was in Chicago last year, Leo Melamed was telling stories about how the key device was to get the realtime terminals like Reuters to show the currency futures bid/offer spread alongside the bid/offer spread on the currency forward market. That was apparently the decisive thing which turned things around for currency futures. Customers could see the superior spreads on currency futures juxtaposed against those of the OTC market, and the 25-year slide of currency futures was reversed.

On a related note, you might like to read the latest NSE Derivatives Update (February 2006) which just came out.

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